e.l.f. Cosmetics: Joey Shamah. The Dollar Store Formula That Built a Cosmetics Giant

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30:31Hey, welcome back to How I Built This. I'm Guy Raz. So it's April of 2004 and Glamour Magazine wants to feature Elf Cosmetics in an upcoming issue. But first, Joey has to make sure they have a working website. So we called my web developer and I said, can you make us an e-commerce part of our website? And we have 30 days to do it. He says, yes, we can do it. I say, and how much is it going to cost? And he said,$5 ,000. I said,$5 ,000? I don't know, that's a lot. I can't really afford it. We're not selling the product. I go, how about I give you some equity in my company? He said, I don't think so.

31:08I think we really need the$5 ,000. So we gave him$5 ,000. He built an e-commerce site. If you saw the e-commerce site today, you would cringe. It was the clunkiest e-commerce site. Not to his fault. That was just the time. And basically, we launched the e-commerce website on June 14, 2004. Okay. So this was, and I'm sure there was like multiple steps, because it wasn't Stripe. It was just hard to get a credit card in. I mean, it wasn't hard. We needed a credit card processor, authorized.net. Yeah, it was a lot. And then once you got the order, you would still have to ship it out. I'm assuming you charge for shipping too at that time.

31:50So basically we decided early on we're selling dollar cosmetics. How do we charge for shipping? Yeah. I'm pretty sure the post office had like a flat rate, like if it's a certain size. Right. So we did a flat rate of$5.95 and we did not accept returns. Okay. So it's hard. You're going to buy cosmetics on this internet thing that you've never purchased on before and you're really going to hope you like it because you're already in it for at least $6,$7 and you can't send it back. Yeah. And this is probably not UPS, so it's not traceable. It's probably like priority mail or something. It was priority mail, yes.

32:28Which means it could get lost and all this stuff. So, okay, so$5.99, whatever, flat rate, and you're going to sell it through the website, and it's complicated. But the other question to have is, how are you going to handle the logistics? I mean, you have it in a warehouse, sitting in a warehouse, but, I mean, who's going to package this stuff up and send it out? So, honestly, we didn't even think about logistics. We were just following Glamour Magazine's lead. They wanted us to make a website so we could get in the magazine. We didn't think we were going to get an order. So we didn't think it all the way through.

33:07We did have a credit card processor. You know, in the warehouse, there was an office. So we had some workers and people in the warehouse that could help out if we got two orders, three orders. Who knew? We had no idea that e-commerce would ever become something. And now it's just you go, you Shopify or whatever, and it's all automated. But then if somebody put their credit card in, you would get like some kind of email or some kind of communication, which you then had to take that information and manually put it into a processor, right? Like a credit card machine. It was so cumbersome. We needed to print it out and then go into the portal, put the credit card number.

33:45Some of the credit cards would bounce back. Then we'd have to email the customer. Your credit card's not working. then we would come back and then we'd print the label and then weigh the package and then drop it at the post office okay you've got 150 grand worth of inventory plus the shipping costs plus all the ancillary costs i mean who knows how much you're in now how much cash is in has gone into this business you know a lot of people may not even know this but but if you don't there was a time where glamour magazine or vogue like that moved product it was a big deal the early 2000s And the late 90s were like the heyday of big magazines.

34:24And even if a tiny mention could have a huge impact. Yes. But this issue comes out, from what I understand, on June 16, 2004. And it's not a huge article about, it's like a couple lines about your cosmetics, right? It's one blurb and a picture of our concealer. Okay. And does anything happen? Do you notice any movement right away? Yes. So I remember walking into the office and we had this screen, like a back end to the website, where if someone placed an order, you'd see the order, the date, and the value. So all of a sudden we walked in day one and we had 400 orders. Wow. And, you know, all the products, the$150 ,000 of inventory came in the assortment packs.

35:16and I remember my father's CFO, who was helping out, we were opening boxes. This one had purples in it. This one had pinks. We had pallets of inventory that only had this color out because that was the hottest seller. So there was stuff all over the place. So you'd be like opening one box. I got the purple here. Somebody else is like, oh, I've got the candy apple red lip gloss in this one or whatever. That's literally what you're doing? Yeah. I mean, after the first six orders, things just start like, what do we do now? So then we took them out of those assortment packs. We built 67 boxes. Each box had the unique item.

35:54Everybody. I remember my brother, who's now a doctor, he came in. He picked a few orders. That was not for him. He never came back, went to med school. We never saw him again in the business. But we were finding anyone that could help us pick and pack orders. Joey, I'm curious. I mean, did you get tons of orders from that Glamour magazine or just, you know, even if it was 50 orders a day, it was exciting? Or was it more than that? I think it was more than the dollars. It was the validation. It was like, yes, we believed that we had something here. So over the next year and a half, we had a lot of these Glamour placements, which were honestly great placements and we wouldn't be here without them.

36:41And then we had even better placement. We had not brand features, but there was one feature that we had in Good Housekeeping magazine. Now, if you remember Good Housekeeping, there was nothing better than a Good Housekeeping seal of approval. And Good Housekeeping gave a feature of our lip gloss at a dollar versus a lip gloss that was sold in Sephora for$24 of Stila Cosmetics. And they said, whichever one you buy, you will love it. I had that blown up in the office. That was a huge win for us. Oprah Magazine did a backstory cover where they laid out all our makeup. And then they made like a piece of art of our makeup around a dollar sign.

37:24and they did a whole article. And every time one of those bigger ones happened, we felt the spike. And by the way, in that first year, 2004, did you try and pitch Sephora? No, there wasn't. You knew that they weren't going to carry your products. I mean, I don't think we could afford to be in there. In that first year of business, because you really, first orders come in in June of 2004, do you remember how much you guys did in sales that year? I want to say about$400 ,000. Okay. So pretty good. I mean, means you sold out your initial inventory, which means you had to bring in more inventory, right?

38:02Yes. All right. So exciting. But was it stressful to you? Did you feel like, I am still worried that this might not work? Every day, every night. Nights were worse than days because days are busy. But yes, I remember maybe in the next year, we had like a budget of like$125 ,000 a month of sales. Like how am I going to hit that? You had to hit that number. We had to hit$125 ,000 of sales a month. Why was that your target? I don't remember why it was. I just remember that number. And I remember we had our web business. We had very, very small regional business where you had a chain with four stores or six stores or eight stores that carried our product.

38:48And then we had a few international inquiries. I remember one from Australia and one from the UK, actually, in Wales. And they started like, can we copy what you're doing and kind of take it to our market and buy the product from you? Yeah. And I said, sure. At this point, why not? Like you're an account like any other and I don't have to worry about all the international complexities. So I'm saying when you put all those together, I think we were able to hit maybe$125 ,000 a month. But I think it was barely to cover costs. There was no growth. Any new inventory had to be funded by my father's capital.

39:29Like it was – Were you worried that he might be just flushing money down the toilet? Yes. It was stressful. I mean, every sales meeting was maybe this was the unlock. In the early days, I remember I was newly married. I was living in an apartment over my parents' house. I just had my first son in January 2004. And I had to, you know, we live in a community that has high expectations and we needed to figure it out. Did it cause any tension between you and your dad? No. Well, he didn't have very, very deep pockets, but he believed in it. And he was happy, I think, from what I saw, to not stress about it.

40:13He felt good about it and was managing it and wasn't afraid of it. And I guess you could have, if everything was just disastrous, liquidated. Like try and sell it for, you know, a cut rate price and maybe recover some of your investment. It's not that easy on a dollar product because you're already at 59 cents selling price. So I'm going to sell it to you for, what, 30, 20? I mean, it's hard. Yeah. OK. So 2004, you're kind of incrementally growing. And I read that you also managed to get a pitch to Target that year, that you managed to make a pitch to them. What was their reaction? so the the first time i met the target buyer was what one of that ecrm trade shows where you are scheduled to meet all the buyers in a 10 minute and i tell her this whole pitch about quality cosmetics color everything and her response was elf why would i want to put something called elf on my face and that was like i i didn't know what to say i i don't even recall my response but that was a challenge and it ended up actually we stayed in touch with the buying team i believe she went off the desk and i don't know somehow we got a call two months or sometime later where they had an opening and they had not in the cosmetic section, but in what they call the trial and travel section.

41:49So we were able to put two or three different items there, the same item, different colors, and we had a bin. And that really was, ended up being a game changer for us. But that didn't happen in the first year. It happened. No, it happened later in 2006, maybe 2005. So, right. Because I read that the first real retailer, like significant retailer that you managed to get into was HEB, the supermarket chain based in San Antonio. Yeah, so the HEB, that was one of our aha moments as a company. Because through all of our no's that we got in the early days, one of the biggest no that we got was we like the product, but we don't want to trade our customer down.

42:31Like if I'm a retailer, if I'm at Walgreens and I'm selling a CoverGirl lip gloss for$6. And I'm going to sell an Elf lip gloss for$1. Now there's$5 that the company, the retailer is not getting. And it was actually HEB, which is a high volume supermarket chain in Texas, that said, we're going to try it. And at that point, we had developed for the local markets, this four-sided spinner rack. It held about 954 pieces, something like that. and HEB was open to putting these racks in each of their stores. So this is like a six foot high rack, something like that? Yes, exactly. So you could spin that rack and it had, you know, 954 products, depending on the size of the product.

43:17So basically we sold this into her and the thing sold out in minutes. And at HEB? At HEB. And did it go into all the HEB stores or just a few? I think it went into 30, but the best thing that happened with HEB is we get an email from the buyer the next morning saying, I was wrong. This brand is incremental and impulsive because they saw that because of the price, I wasn't buying one or the other. I wasn't not buying CoverGirl for$5 or$6 and just buying e.l.f., but I was buying CoverGirl and buying e.l.f. or I still have$5 to spend, but I'm going to buy five products because there's such an array of product and really, you know, maximize my dollar.

44:05So essentially it wasn't actually eating into the sales of CoverGirl or other more expensive products. It was just people were buying more product in that department. Yeah. It was adding more to their top line, not taking away from their sales volume. And that changed our whole sales pitch and the whole everything going forward. And then we went in all HEBs and then there were some HEBs that put four racks into the store, each store. And it became, it was our first viral sensation, I guess. So how did that, you said it changed our approach. How did it change your approach in how you sold this, try to pitch this product?

44:47because as we're meeting retailers and their responses i don't want to trade my customer down we're saying look heb's doing it and it's not it's adding incrementality they're selling more it was a combination of impulsive meaning i didn't want something but i'm going to go get i'm going to get it anyway because it's so cheap maybe i was going to buy a candy bar instead i'm going to buy a lip gloss so there was no barrier to entry and you had data to back it up and we had data okay Okay, but HEB, you're still having a hard time getting into these other retailers. You know, HEB is great, but from what I understand, it's still going to take some work.

45:24And HEB alone doesn't make your company profitable yet, right? No. No, okay. And what were your, aside from just product, what were your other huge expenses? Because you're not doing any marketing. So what were your expenses? So at this point, we now had our own office. We were building somewhat of a staff. I was still very involved in every element, but I was leveraging some people. Now that my father's apparel business was changing a little bit, we brought on two or three people from that business. And then we brought on someone right out of college, but she was great to help with some of the marketing and product stuff.

46:03Probably some of the more experienced people were expensive. Very expensive. And did you guys ever think about like, you know, let's offer people equity for lower pay because it'll save us money? Um, no. I mean, people needed to make money. They needed to pay their rent and their equity really wasn't worth much because we didn't even know if we were going to have a business. It wasn't the currency people were looking for at the time. Right, right. Didn't make sense to them. I mean, of course, I'm sure they were kicking themselves later. But okay, so you're an HEB and still, and do you remember by that point, by the time you're an HEB and you see, you know, you see this phenomenon, they're starting to feel like, okay, we're cooking now or still sleepless nights?

46:51Still sleepless nights. There's a large hill to climb. A, to be profitable, and then B, to be successful. So how are we really going to get to the top of the mountain, so to speak? What kept you up at night? Failing. Not being able to, you know, my father was still helping fund this. We were narrowing the gap, maybe. But how big can big be? I'm selling dollar cosmetics. Where do we go from here? Where's Target? Where's Walmart? Where's Walgreens? Where's the big guys? Like, how do I, I'm competing with CoverGirl and Revlon and L 'Oreal. Like, these guys control the space. And when you're selling something for a dollar, you have to sell a lot of it for it to be a successful business, right?

47:39You can't just rely on one regional chain of grocery stores. Yeah, you have to be anywhere and everywhere. And you have to constantly be shipping it in. Because even if you set, like, our four-sided spinner rack held 954 pieces. But once you sell 954 pieces, you have to send in another 954 pieces. So there was a lot. Like, if a$10 item was needed to do$1 ,000 in sales, they were only to need to sell 100 items. We need to sell 900. Yeah. I mean, it's like a Slim Jim at the gas station. I mean, the price difference wasn't that high anyway. You got to sell a lot of Slim Jims. Exactly. And there's only four flavors of Slim Jims, right?

48:22We have 67 items. I remember in the early years, we were making money. And I told my father, like maybe a little later, but I said, okay, the company made money. Where's my share? And my father turned to me. He goes, he left. He's like, no, no, no. You got to invest that back in. You have to do it again. And then eventually you'll get there. But that's kind of, that was my naivete. Okay. So I read about this story that happens in 2006, and I wonder if it was sort of strategically manufactured, but it was a rumor that came out about e.l.f. that actually really ended up being an amazing boon for the company.

49:11Tell me about this rumor, and were you involved with it? Did you manufacture it? so i always tell everyone if i manufactured it i would have done it over and over and over again so i definitely can't take credit for it all right but it was september 2006 and we had just come back from another industry trade show um and i remember we were in a recap meeting with we had a sales rep at the time who was there and we were all of a sudden the phone rang and outside of being the ceo of the company i was also the receptionist and the customer service care rep So I answered the phone and she says, the woman says, is this Elf Cosmetics?

49:49And I said, yes. And she says, is it true? I said, is what true? She said, I just got an email that you're being bought by Bloomingdale's and that all your cosmetics are going up in price. I said, I don't, news to me. And then I checked the website and all of a sudden we see orders coming in by the tens and hundreds. And it was, I think at one point through this viral spike, we were like the 80th most visited site on the internet. Wait, where was this rumor coming from? Where was it? Where were people hearing it or seeing it? It was just an email. It was one of these, like, we have no idea where it started till today.

50:34And everybody got it. My target buyer got it. My aunt in California got it. My cousin, my everyone you spoke to till today when i say elf cosmetics they say oh i got an email that you were being bought by bloomingdale's in 2006 so this rumor comes comes out and it turns out that people panic and they're like wow the price are going to go up we better buy buy it while we can yeah i mean over so we were getting about 300 orders a week at the time depending on the liberality. We went from getting 300 orders a week to 18 ,000 orders a day for the next six weeks. Okay. That's exciting. But were you also a little bit worried that, oh, what if people actually think this is true?

51:16The orders are going to drop off pretty soon. So our excitement was great. I mean, the orders were coming in rapid fire, but we didn't have the inventory to support those orders. We didn't have the process to reorder, to pick, to pack, to do anything. So we didn't know where it was going to stabilize or what it was going to mean in the long term. But right then we were just drinking from a fire hose and we were just trying to figure out how do we get these orders to our customers? How do we continue to build off this virality and find ways to take this to the next level? So how did you fulfill those orders?

51:56I mean, you know, could your, what did you do? So I got on a plane and I went to our factories in China. I went with our agent and we had to figure it out. I remember when I first got to China, our first or second night there, I called my father and I'm like, I don't know what to do. Like, this is too much. I can't do this. And I remember I was on my BlackBerry in the elevator and he tells me, this is it. you either figure this out or we pack up and go home. Like this is what you built. This is what you wanted to do. This is your opportunity. When we come back in just a moment, a financial deal that finally lets Joey sleep at night and an ill-fated sale that wakes him right back up.

52:46Stay with us. I'm Guy Raz and you're listening to How I Built This.

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55:11Hey, welcome back to How I Built This. I'm Guy Raz. So it's the fall of 2006 and Joey is in China scrambling to fulfill an unexpected surge in orders. We had to find a warehouse. We had to make the goods. We had to create a system to pick and pack the goods. And all this was done on the fly as the order velocity was continuing. And it took about six to eight weeks. And we shipped 192 ,000 orders from China direct to customers in the US. And then that year we were projected to do$2 million for the year. After this spike, we did about$8 million. We were profitable. Wow. And we never looked back.

56:00Wow. I mean, talk about trial by fire. Okay, so you get through this, but now you've got real sales, right? And I guess it's around this time where you managed to finally convince Target to let you in. so actually in 2008 i get a call from target now we had a very small relationship with target we were in the trial and travel section and the target buyer said what if elf made us a holiday end cap program for our stores end cap at the end of an aisle probably facing the registers right yeah i mean this is you know when you walk into target they have what they call the racetrack this is on the end.

56:42Every cart is passing this thing. This is the primo spot. This is like the Park Avenue of Target. This was like, it pinched me. Am I dreaming? It was like the premier retailer. First of all, Target was always like the retailer growing up because my father was doing business with them. It was in line with our values. It was perfect. Now, this was November 2008 for holiday 2009. So still 11 months away. You don't ship till October for that. But we were like, we are in. Okay, you're in Target. But from what I understand, they actually want you to raise the price. They don't want you to sell it for a dollar.

57:26Which is interesting, because most of the time when retailers, CPG retailers go to Target, they're urging them to lower the price or to offer coupons and, you know, especially around food, right? A lot of times retailers are saying, hey, you got to cut off a dollar. Here, they're urging you to increase the price. And you guys were reluctant to do this? So they wanted us to increase the price, but not of our everyday merchandise. They appreciated the incrementality and impulsivity claims that we were making, but they still felt that we needed to continue to grow the price point. So at the time, we're launching a small line called Elf Studio.

58:13And basically, if we had a four-foot section in Target, half of the section was a dollar and half of the section was now$3. Okay. Was it the same product inside? So yes and no. The same quality of product was offered on both the Elf and Elf Studio. However, often the Elf Studio was dual-ended. It also was bigger. So if this was one ounce, this was one and a half or two ounces. It had a little bit more pearlescence. But for the most part, we stood behind the quality of both the Elf and the Elf Studio lines. But it really sounds like it wasn't that different in terms of what you were offering. But I mean, why would a customer think that?

58:56Like, that's a question I would ask you at the time. If I was on your team, I'd say, Joey, I don't know if people are gonna buy this. You know, they're used to us being a dollar. One of my buyers told me a long time ago, something that really stuck with me. Price is what you pay and value is what you get. And as long as we're committed to continuing to offer our customer extreme value, she doesn't want us to be stuck to the$1 price point. Because if we could take a$35 item that they get at Prestige Retail and bring it down for$3, she wants that. If it's a$12 lip gloss that we can bring for a dollar, she wants that.

59:31But it just needs to continue to convey value. Okay. So you, up until this point, your sales and target were for trial products, like you're going on vacation and you just buy a bunch of things. How much of a game changer was it when Target says, OK, we want you to have the second tier in addition. Was it a small bump or was it a significant bump? The biggest win was our ability to compete on everything you do in the food and drug mass arena is sales per linear foot. So if you're in a four foot section, they want to know how much volume, how many sales you're going to do per foot on that four foot basis.

1:00:12So when Elf first launched in Target, they were forecasted to do$60 per linear foot per store per week. Out of the gate, we were at$100 per store per week. So we were already performing on par or better than expectations and a lot of the competitors. And you were already D2C for six years at this point. So now you're, I mean, this is the beginning of the D to C craze, right? 2010s. Before we get into this, here's a question for you. You not only do you weather the financial crisis of 2000, let's say seven to nine, and it continues really to 2012 when the market only fully recovers. There's always this story about financial crises or recessions and it's lipstick is always used as an inelastic, like people will still spend money on lipstick because it's something people are comfortable spending money on and it's kind of recession-proof and people still want to look nice.

1:01:12Was that true? Did you see that happening in real time? Not only did we see it happen in real time, it's what propelled our success because, like you said, in 2007 and 2008, during the financial crisis it happened to be at the same time that revlon launched a brand called vital radiance now you probably don't remember ever heard of it i don't and l 'oreal launched a brand called hip to compete with mac and the major premise of both those brands was we are going to sell more expensive cosmetics in the drugstore arena we are going to compete with sephora at duane reed at CVS. And that was an utter failure.

1:01:57That failed miserably, quickly, and that is really what opened the door for Elf Cosmetics to get shelf space at Target and really continue to become a brand that's thriving in the retail space. So even though so many businesses were struggling at that time, it was a combination of price point and the product. People still bought cosmetics. People still want to look good. Yes, because if you're not going to go to the salon, you might as well find the next best thing. It's so interesting. Yeah. All right. I mean, you guys are growing and you're finally, you started this business, really launched in 2004.

1:02:38Six years in, you got to be feeling like, okay, this is now we are cooking with gas here. Do you remember roughly by the end of 2009, what you guys were doing in sales a year? I remember at the end of 2010, we were doing about$30 million in sales. Wow. And we were able to do it a lot because of the mix of business between web and retail was a great mix for a growing business. Because when you're operating on web business, you have a high margin business. Sure. And you have immediacy of cash. So I'm not going to have to wait. when I sell to Target or if I sell to retailers, I buy the goods, ship the goods, then get paid 60 or 90 days later, as opposed to the internet business, I'm able to get paid right away.

1:03:27So we're really able to grow from 10 to 20 to 30 million with very little additional debt or leverage. Joey, how many hours were you working on this a week? Like now we're getting into 2010. Was it all consuming? Yes. I mean, again, I'm a Sabbath observer, so we work 24-6. You stop working on sundown on Friday until sundown Saturday. You don't answer your phone. You don't, no calls with China. You just stop. Yes, we take a day off. It's a great rest day and it really, it gives time for family. But other than that, if you're not sleeping, you're working. Okay. So you get to a point where, you know, things are looking pretty good.

1:04:0930 million a year. And I guess in around 2010, at some point you get an unsolicited call from an investment banker saying, hey, we have a client interested in maybe making an offer. I got a call. It was January 2010. And this woman calls me as a cold call. And she's like, I see what you're doing. And we'd love to kind of represent you and seek a sale process. And who is she? Her name is Vineto. She was at a small boutique investment banking firm called Financo. And she said, you know, this is what we do. We'll take you to potential investors. Then we'll narrow the field. We'll ask for indications of interest.

1:04:57And then we'll get some final offers and we'll see what we want to do. And we'll start with the$25 ,000 retainer. I said, this all sounds nice, but I don't know you and I'm not giving you$25 ,000 on a hope that this is actually going to work out. So she came back and she said, okay, we're going to waive the retainer, but we want to do this process with you. We really like the company you're building. And I remember we got a lot of private equity interest. Okay. 30 million a year in sales. So let's just say the valuation was 5, 6x. Sounds about right, more or less at that time? It was closer to 8 to 10x.

1:05:37Okay. Great. So there's a number out there. Are you comfortable saying what the valuation was in 2010 at that time? The valuation of the company was probably, it was about$70 million. Okay. $70 million. So here's a question for you. At$70 million valuation. Why were you open to selling some or all of the business at that point? The first reason was we had an opportunity to do something for the family, which was perhaps not generational wealth, but wealth for definitely more money than I've made in my life. I was 29 years old. I was able to put money away. And if everything else fell apart, I would still have financial flexibility.

1:06:21And the second reason was I didn't know what I didn't know. Maybe L 'Oreal and Revlon were working on the next thing to take me out in 30 seconds. I had no idea. And then the third thing was really just like, it's not what you know, it's who you know. So I think being connected with these guys who are in this private equity world that are selling companies every day. They know the steps. They know the game plan to make you sale ready for the future. Got it. Okay. So you get bids and you end up accepting an offer from a private equity firm, TSG, Consumer Partners, right? Yes. And they're going to take a minority share.

1:07:05So 49%, you guys are still going to own a majority of the company and you're going to get a check. You're going to get, you know, probably I'm assuming anywhere from seven to 15 million dollars in the bank. Correct. More than that, but correct. And explain how it works. They they basically buy a minority share. You get a check. And then do they also put more money into the business to grow it? So there are situations like that. But because Elf didn't need their additional capital, so all the money, you know, a few things change. that you have things you can't do. So I can't sell the company without them.

1:07:43I can't hire some crazy salary. Like there's a few guardrails, but for the most part, there was very little difference from the day before we closed to the day after we closed, except on the ownership structure, we now had a partner. And now you had some money. Yes. That's when we started sleeping at night. I understand that. I mean, I think there are entrepreneurs who would say, I could see where this is going and I just turned this thing down, right? But you're saying, hey, this can go the other way at any moment. Like you had healthy paranoia. Yeah, look, and I would have done a lot better if I did that in the long run.

1:08:22If you didn't sell. If I didn't sell, but I don't regret what I did one minute of one day. And I always say, Elf has had subsequent liquidation events over the last 10 years since then. this was the smallest by far the smallest right but it was the most impactful you know the stress of your life is now it's much less you're not stressed on are you going to make it you're excited about what the future is going to bring yeah now i know that a little sort of not too long after that maybe a year or so after that um scott who had you had who was involved in the beginning. He leaves. And from what I've read, I mean, first of all, do you keep in touch with him?

1:09:07Do you have any connection with Scott anymore? So Scott left a little before that. Scott left in 2008. Scott came to us, my father and I, and we started another business called Borba, which was a nutraceutical beverage. And the concept of the beverage was it's skincare through nutrition. So basically you drank two of these a day and your skin was clearer. And Scott found a partner for Borba and he took the Borba business. They bought our steak out and they took it, that business, and then we stuck with the Elf business. So it was a very amicable split. Since then, Scott and I have lost touch. I think the Borba business never really took off.

1:09:51I believe Scott became a pastor at some point. I don't know. Yeah, he already became a priest, which is an amazing story. Okay, so that was that. And now you've got a private equity partner. And it turns out that L 'Oreal in 2013 approached you and your minority owner to buy you out. And you guys went deep in this negotiation. Tell me about that. Offer that conversation. So it was actually Revlon that reached out first. And after I got a call from Revlon, I called my good friend, Vinette, and I said, Vinette, what do I do? So she goes, okay, you guys are still, you guys, it's a little early. Normally these take a few more years, but you guys are killing it.

1:10:41You're really doing so well so quickly. Like, let's run another process. So we met now with more strategics who are interested. And actually, L 'Oreal came through with the best offer. They offered us about$225 million for the whole company. And we were very excited at that point. And we were ready to sign. And now this is lock, stock, and barrel. We're selling the whole company. We are done. We did it. 12 years ago, we started. We're ready. We're getting our checks. We're leaving. And all of a sudden, Vinette calls and she said, L 'Oreal's passing. It wasn't happening. You were going to get over$100 million, you and your dad, from that deal because you had 51%.

1:11:26And was there any clause in the negotiation that if it fell apart, you get some money or no? No, zero. So you were just assuming that everything is, and you get a call that they're pulling out. Why? So at the same time that they pulled out of the Elf deal, they also bought a different company called Urban Decay. Sure. So I think they were trying to just play both sides or see what got them to the finish line. They blamed it on the fact that they couldn't get comfortable with our supply chain and that we were so low cost and they weren't comfortable with it. But I think that it was really because that they were focused on the Urban Decay deal.

1:12:06Wow. So they were really, we did Urban Decay on this show. It found a fascinating story found by Sandy Lerner, who also co-founded Cisco Systems. It's a fascinating story. So you must be, you must have been crushed. It was crushing in the moment, but in hindsight, it's such a blip on the radar of what it's become and how much money we subsequently have made through this, that it was a blessing in disguise. And in 2013, we regrouped and then we did a process and that's how we got TPG. TPG comes in. This is a different company, right? Different private equity. And they come in to buy a majority stake from you and your dad.

1:12:54And they value the company at$265 million. So they're going to buy a majority stake, which means that you guys are going to hold on to a sliver of the company. So that was when we were selling to L 'Oreal, we were selling 100 % of the company. When we met TPG, they're like, no, we really like what you bring to the table. We want you guys to roll equity with us. And we want you to stay on, stay involved and stay as equity holders. And I remember when they finally gave us a firm offer and the offer was, we're going to buy a majority stake in the company and we're going to bring in a CEO to lead the company.

1:13:31It was like a weight was lifted off of me. And I'm like, wait, it's not going to be my problem anymore, but I'm still going to have equity and upside. It was like a freeing experience. And they brought in the CEO, Tarang Amin. He's still the CEO. He's still the CEO. He's delivered a lot of value for shareholders. He took the company public in 2016. It's amazing. I mean, so you guys stayed on for about a year and a half, right, during the transition. But really, it was – you were kind of winding out. You were winding down your time. And I'm assuming by the time you finally – you actually left, you were done.

1:14:16You were out, out, out. Yes. We worked with Terang and team for about a year and a half, a little bit more. But it was probably the most impactful two years of my career. because I call it my master's program. Yeah. Because I was able to learn how it's done on the other side, how Clorox execs and P &G execs, and how they look at the business, how they structure teams. It's a mixture. It's a blend of the entrepreneurial spirit and the best-in-class work ethic that they do, and I put it together. Okay. So you are out of the picture, But you now really have created wealth, significant wealth for yourself and in a way that you can kind of just, I don't know, do whatever you want.

1:15:08You can invest money. You can do nothing for a while. And I guess for a while, you actually did not much. But tell me about that period because it sounds like you actually were not happy. Yeah, so my father and I officially left Elf in December 2015. And I vividly recall one morning when my kids got up to go to school and I sat down on the couch and I started watching House of Cards. And then a few hours later, my kids came home from school and I was still watching House of Cards. And I'm like, I can't do this anymore. And at that point, we were working on something else, but it was taking a long time.

1:15:50But I knew that retirement life at 35 years old was not for me. Yeah. And probably not particularly, not a great example for your kids, right? To be. Yes, that's for sure. And I think within a year, maybe less, you started a new company that you called Fit for Life. And I guess I should explain, it's kind of a cool concept, because I guess you basically partner with big brands like Reebok or Gaim, which does yoga products and Fila and you basically get the licensing rights to sell products with their branding on them? Yes. The way we look at Fit for Life is anything that you see in a gym that's not a machine.

1:16:29So any of the mats of the small weights of jump ropes, weighted vests, all that, those are the things that we do. And you manage the whole process of like manufacturing, distribution, sales? Exactly. So yes, we have relationships with retailers. We sell to Target and Walmart and Amazon. We are making the product, but they maintain the brand. That's their job. And our job is to operate the company and together with them create great products. What a fascinating business. I mean, it's, and, and is it a good business? It's a good business. The fitness business is a good business, but it's not nearly as exciting as the beauty business.

1:17:07Yeah. Right. Beauty business is trendy. It's quick. There's virality. There's, there's a lot of excitement. There's a lot of M &A deal, like there's a lot going on. The fitness business is, I'm sure you own a yoga mat. When's the next time you buy your next yoga mat? So the velocity is a lot slower and it's less, less exciting. So which brings me to your next business, which makes sense because you get back into the cosmetics business, the beauty industry business. You start another company as beauty, But this time you guys are acquiring brands. And tell me a little bit about this business. This is an interesting business.

1:17:47So in late 2018, I get a call from my good friend, Vinette. She's telling us about a portfolio of beauty brands that was owned by private equity to compete with some of the big guys. It was not doing very well. And they asked us to look at the business and to possibly buy the business. two months later they were getting in worse situation and they were going to file for bankruptcy at that point we looked at it again and the benefits to bankruptcy is that it kind of hits a reset so any bad contracts any old monies owed and things like that all go away and you're able to start on a new slate and go forward from there and we now run a company called as beauty which owns the assets and the company of laura geller beauty julep and we closed on that deal in February 2019.

1:18:39And it still has a following because people remember those brands. Yes. So when we bought the business, it was a downtrending business, but it was still a business. And now we are growing the business very nicely, both online and on Amazon. It's interesting because you think about big brands in the 80s, like Guest Jeans or or Massimo and Fila is huge in Southeast Asia, in Asia, I know, which was huge when I was a kid in the 80s and 90s. But a lot of these brands that, you know, people in their sort of 40s, 50s, 60s will know, it's like owned by somebody else. Maybe it's been sold multiple times, but still using the brand.

1:19:21It's just an interesting business to me. Yeah, I think when you look at the retail environment, there's so much clutter out there. So any point of differentiation is valuable. So when you have a brand like Guess or Fila that you've grown up with, like Reebok, you remember those pump up shoes from the 80s, right? Of course, I have them. So that's something that cuts through the clutter and allows you to stand out as well as gives the customer confidence that this is a brand and that there's something behind it. So you've got – this is what you focus on. Going back to e.l.f., it's amazing. I mean it could have – you could have sold it, walked away, and we've done – we've done Beauty Counter.

1:19:57We've done some other brands that once they sold, it went downhill. The opposite happened with Elf. It grew and grew and grew. I mean, I think I just checked their market cap. It's like$3.8 billion. I mean, it's a big company. It's doing really, really well. Yep. I mean, do you think that how you started this brand in 2002 and really launched in 2004, you could do this? You could recreate the playbook today? I think when we created the brand in 2002 and three and four, our biggest obstacle was how are we going to get space in a retail environment controlled by four guys? I think today, now, it's how are you going to own the most amount of attention from the consumer on Instagram, Snapchat, and Meta?

1:20:50So could I have done it today? Probably. Would it look different? Definitely. Do I have the tenacity and goal to do it again? Probably not. I wouldn't start a business at this point in my career. I think buying a business is a much easier entry. But I think if I was a young entrepreneur and I needed to cut through the clutter, a thousand percent, if you're creative and committed, you can find a way to do it. Joey, when you think about this journey that you took, you know, of course, you had a lot of, I mean, you know, you did have help from your dad. There's nothing wrong with that, but it's still it could have failed.

1:21:27Right. It could have it could have gone nowhere when certainly when the dollar stores didn't validate this idea. And then you think about where you got to. How much of that do you think had to do with just the grind you put in and how much do you think had to do with getting lucky at times? So I think when you get lucky and when you have the desire to be successful, that's when you will be successful. So I go back to that elevator story I gave you a little earlier, that when my father said, like, this is it, you either figure it out or you pack up and go home. I didn't manufacture that Bloomingdale's email, but I could have tried to.

1:22:05But it doesn't mean I would have been successful. You can't wait for luck and you can't manufacture opportunity. But when that luck is there, you got to take advantage of it. Come hell or high water. That's Joey Shama, co-founder of Elf Cosmetics. By the way, you know how we mentioned that Joey's former partner, Scott Vincent Borba, left the beauty business to join the priesthood? Well, just a few weeks after Joey and I did this interview, Scott was, in fact, ordained as a Roman Catholic priest in the Diocese of Fresno, California. When he left the world of business, Scott also left the trappings of his former life behind.

1:22:43He said that he gave up his fancy house and car, his Gucci suits, and his 401k. And as for his new life, Scott told the New York Times that he's looking forward to serving God and working with his parishioners. Hey, thanks so much for listening to the show this week. Please make sure to click the follow button on your podcast app so you never miss a new episode of the show. And as always, it's free. And if you're interested in insights, ideas, and lessons from some of the world's greatest entrepreneurs, please sign up for my newsletter at GuyRoz.com or via Substack. This episode was produced by Carla Estevez with music composed by Ramtin Ereblui.

1:23:21It was edited by Neva Grant with research by Olivia Rockman. Our audio engineer was Patrick Murray. The production staff also includes Carrie Thompson, Alex Chung, Sam Paulson, Casey Herman, JC Howard, Chris Messini, Catherine Seifer, John Isabella, and Elaine Coates. I'm Guy Raz, and you've been listening to How I Built This.